The Northern District of Illinois has partially upheld the Illinois Interchange Fee Prohibition Act, marking a significant development in U.S. payment regulation.
What the Act Does
The Illinois Interchange Fee Prohibition Act bans card networks and issuers from charging interchange fees on the tax and gratuity portions of debit and credit card transactions. This is the first state-level interchange regulation of its kind in the United States.
Court Ruling
Upheld: The core prohibition on interchange fees on tax and gratuity amounts
Struck down: Only the provision restricting the sharing of certain transaction data, on First Amendment grounds The ruling means the substantive fee prohibition survives legal challenge
Why It Matters
Interchange fees are the largest component of card acceptance costs for merchants, typically ranging from 1.5-3.5% of transaction value. By excluding tax and tip amounts from the interchange calculation, the Act reduces merchant costs on every card transaction that includes these components - particularly impactful for the restaurant and hospitality industry.
Broader Implications
State-level precedent: Other states may pursue similar legislation targeting interchange fees Federal context: Complements the federal Credit Card Competition Act (CCCA) proposals that have stalled in Congress Industry response: Card networks and banking associations challenged the law, arguing federal preemption - the court largely rejected this argument Merchant impact: Restaurants and service businesses stand to benefit most, as tips and sales tax can represent 20-30% of a transaction total
Payment Infrastructure Impact
The ruling does not affect how payment systems process transactions technically, but it changes the economic model: Networks must calculate interchange on the base transaction amount excluding tax and gratuity This requires transaction data disaggregation at the point of sale POS systems and payment processors will need to support itemized reporting
What to Watch
If the ruling survives appeal, expect a wave of similar state-level interchange legislation. The combination of state action and renewed federal interest (CCCA) could fundamentally reshape card payment economics in the U.S.